LO 58.9: Differentiate between solvency capital requirements (SCR) and

LO 58.9: Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solvency II framework, and describe the repercussions to an insurance company for breaching the SCR and MCR.
There are no international standards to regulate insurance companies. In Europe, Solvency I establishes capital requirements for the underwriting risks of insurance companies. Solvency II is expected to replace Solvency I and will consider operational and investment risks in addition to underwriting risks. While Solvency II was expected to be implemented in 2013, the date has been postponed. Solvency II has three pillars, analogous to Basel II.
Pillar 1 specifies a solvency capital requirement (SCR). The SCR may be calculated using the standardized approach or the internal models approach (discussed in the next LO). Repercussions for breaching the SCR are less severe than if the firm breaches a minimum capital requirement (MCR). If the SCR falls below the required level, the insurance company will likely be required to submit a plan for restoring the capital to the required amount. Specific measures, determined by regulators, may be required.
Pillar 1 also specifies a minimum capital requirement (MCR), which is an absolute minimum of capital. There are at least two methods for calculating the MCR under consideration. First, MCR may be set as a percentage of the SCR. A second possibility is to calculate MCR the same way as SCR, but with a lower confidence level. The repercussions for breaching the MCR are severe. If a firms capital falls below the MCR, regulators will likely prohibit the company from taking new business. Regulators can also force the insurance company into liquidation and transfer the companys insurance policies to another firm.

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